 Hello, in this lecture, we're going to work a problem dealing with treasury stock. We're going to have the information over here on the left-hand side. We'll post that information to a table on this section. Then we'll record the general journal entries in this blue area here. And then we'll see what happens by posting those general journal entries to a trial balance format so that we can see a quick outline of what the journal entries would do in context with a set of accounts on the trial balance. So let's take a look at the trial balance at this time and see what we have and then go back to the problem. We've got a simplified trial balance, we've got cash as our only asset right now. We have the liabilities on the payables and the common stock payable. And then we have the equity accounts for this world where we will be spending some time working with the treasury stock, which is a part of this equity section for a company. Then we've got the revenue and expenses. We don't have any revenue and expenses at this time for this problem. We know that we are in balance by the fact that the debit's positive numbers minus the credit's negative numbers adds up to this zero down here so that zero indicates that we are in balance. No net income at this time. Then we have the assets lined up here, the liabilities and the equity on this side so we can see that we are in equation in balance on the accounting equation as well. Alright so let's take a look at the problem and see what we have. So first off it says we're going to purchase treasury stock, number of shares we're going to purchase $5,000 and the cost will be $25. So we're going to purchase our own treasury stock. So if we think of the calculation on that what's going to happen here is that we will be purchasing 5,000 shares so I'm going to do this calculation right here, 5,000 shares is what we will purchase of our own treasury stock that is outstanding. We're going to purchase those for $25. Now how did we get that $25 number? That's basically going to be the market price that we're going to pay for our stocks to purchase them back. So we're going to multiply that out. That means that this equals the 5,000 times the $25 which means that we are going to purchase them for $125,000. So then let's take a look at what the journal entry would look like for that transaction. I'm going to scroll over here and take a look at our chart of accounts. First question generally is cash affected and yeah cash is affected. We are purchasing our own treasury stock. So our own treasury stock is outstanding trading and we are purchasing it back for cash. Cash has a debit balance. We need to make it go down. Therefore we're going to do the opposite thing to it which in this case would be a credit. So we're going to credit cash. So I'm going to copy cash and right click and copy cash going to put that on the bottom. What we could put the date here as well. The date should be 1-1 and we're going to put it on the bottom from the date because the credits traditionally go on the bottom. Right click. I lost it. I'm going to copy cash again. Copy cash. Put our cursor in the bottom H-3. Right click and paste 1-2-3. So just the values only in there. We could type that in there as well. I'm going to put this number. This is how much we're going to pay. I'm going to put it in there with a negative for this worksheet to represent the negatives with negative numbers. The credits with negative numbers in this worksheet. So we say negative 125,000. That's how much we will pay. Then we're going to have a debit for 25,000 as well, 125,000. So we have 125,000. What will that debit be? It will be treasury stock. So note that this is very similar to purchasing any stock where we would debit the stock and credit the cash if we purchased stock. The treasury stock note where it's located on the trial balance. It's over here in the equity section. It's not an asset. We're not buying someone else's stock. We're buying back our own stock. However, the transaction looks an awful lot like a normal transaction when we would buy stock, but the difference being that the treasury stock will be down here in the equity section. So keep that in mind. We're going to copy the treasury stock. That's what the debit will be. I'm going to put that in H2, right click and paste 123. All right, we're going to post this out now and see what happens in context to our trial balance over here. So we're going to post the treasury stock to the treasury stock in the blue area on the trial balance. So we are in N12. N12 equals going to post this 125 and see what happens should go up in the debit direction to 125. Note that it's in the equity section and it has a debit balance. That means it's kind of like a contra equity account then. Why? Because most equity accounts have credit balances, as you can see, and this one has a debit balance. So it's the opposite contra to the norm. And therefore it's going to bring down the equity section and be a contra equity account. We're going to post the other one to N7 in the cash area. So we're in N7 equals we're going to point to that 125. That's a credit. This is a debit. Those are opposites. That's going to make the cash go down. So that puts us back in balance here and we were posted that first transaction. Now of course we have treasury stock on the book at 125. We could sell that and we are including there the 500, the 5,000 shares. Next transaction we have on N12, declared dividend per stock holder of $2. So $2 per share dividend is what we will be declared outstanding as of this point in time. So let's think about the journal entry when we declare the dividend. So the first question we have is generally is cash affected? And in this case it is not because we haven't yet paid the dividend. We've declared the dividend but we haven't yet paid it. When we do pay the dividend of course it will be coming out of cash. So therefore what we have then is a form of payable at the time of declaration and that is going to be a liability account. It's going to be something that we owe. So we have a common dividend payable being the liability for the dividends that we have declared as of the time we have declared them. We have an obligation to pay them and therefore we need to record the liability as of that point in time. So the date here will be, I'm going to skip a line and put our date on N12 and we're going to record a liability. Note that liabilities have credit balances. We need to make it go up. We owe more money to people because of the declaration that we have made the company owes money. Therefore we're going to do the same thing to it as what it is. They have a credit. We're going to make it go up by crediting the dividends payable liability account. So I'm going to click on L9, right click and copy that. Put our cursor in H6 which is under the date. We're going to put it on the bottom again. Right click and paste it 123. Then we'll be over here in J6 and we're going to say this is going to be, now we're going to have to do the calculation for the dividends that will be outstanding. Now note that what we have, we have the $50,000 at 10, $500,000 worth of shares. We can see that in here, the $500,000. If we divide that by the par value, we know that there's $50,000 shares included in that number. However, we also have the Treasury stock here that we purchased back and it's not on the books at the par value. It's on the books at what we purchased it for. So what we need to do then is note how much is issues and outstanding. We got the $50,000 that are originally issued but we bought $5,000 of Treasury stock back. Therefore, what we have is the $50,000 minus the $5,000 because we're not going to pay dividends to ourselves. The company doesn't pay itself dividends, $45,000 shares that we're going to pay dividends on and then we're going to multiply that times the $2 and that'll give us the $90,000. So let's do that calculation again. I'm going to do it here. I'm going to put a negative here to make it a negative number. It's going to be the $50,000 originally outstanding minus the $5,000. I'm going to put brackets around that because of the order of operations and then multiply that times 2. So all we did, all we're doing there here's the formula is saying the $50,000 minus the $5,000 gives us $45,000 times 2. We're going to put brackets around it because I want us to do the subtraction before we do the multiplication and we made it a negative in this case to flip the sign so that it would be a credit on our worksheet. Then we're going to debit something for $90,000 and that debit will be for the retained earnings in this case. What is a dividend? A dividend is the payment of the retained earnings, the accumulation of income in the company to the owners. So the retained earnings is going to be down here. That represents the amount of money that has accumulated, which we are now going to pay out to the owners in the form of dividends. Note that it has a credit in it and we're going to make it go down. So we're going to make it go down by doing the opposite thing to it, which in this case is a debit. So we're going to copy that. I'm going to put my cursor on the retained earnings, right click and copy. Put that up here in H5, right click and paste 1, 2, 3. So here we got our transaction. We're going to post this out. We got the retained earnings at 90. There's the debit. Here's the retained earnings down here. We're going to post it here. We're going to post it into column N. So in column N, we're going to say equals 0.2 to the 90,000 and this is a debit. This is a credit. Those are opposites making this account go down. Then we're going to do this for the second account being the common dividends payable here, which is going to be represented by this account here and we're going to post that to the sale of N9. So in N9, we're going to say this equals 0.2 to the 90,000. That's going to make the liability go up in the debit direction and put it back in balance down here. So we'll say enter goes up. We're back in balance down here and we can take a look at the next transaction. So next transaction is going to be on 228. And then in this case, we're going to, in this transaction, we're going to pay the dividend declared. So we're going to go over here and say on 228, we're going to pay the dividend. So if I take a look at the trial balance, then we could ask our basic question on this one, is cash affected? Yeah. So we paid with cash. So cash has a debit balance. We're going to make it go down. So we're going to do the opposite thing to it, which in this case would be a credit. So we're going to copycash them in L7, right click and copycash, put our cursor under the date. So it's in H9, right click and paste it 1, 2, 3. And we're going to pay the dividend. So we're going to pay this 90,000 that we just put up here. So I'm going to make that a credit in J9, negative 90,000. Then we're going to debit something for 90,000, 90,000. And what are we going to debit? We're going to debit that declaration that we had just made in the liability here. So that 90,000 that we said we obligated ourselves to pay, we are now paying. That 90,000 is a liability with a credit balance. We need to make it go down to zero. Therefore we're going to do the opposite thing to it, which in this case would be a debit. So I'm going to copy that. Put that on H8, right click and paste 1, 2, 3. All right, let's post this out now. So we have the common stock dividend payable debit. And then we have where we're going to post it here. Note that there's something in it already. And so there's something in it. Of course, J6 is what is in it. So we're going to double click on it, go to the end of it and add plus the 90,000 here. This is a debit. A credit is currently in there. Those are opposites making it go back down to zero. We're going to do the same thing for cash. So we're going to post the cash. Here's cash. Here's cash in the trial balance. Here's where we're going to post it. It's NN7. We're going to double click on that. Go to the end of it and say plus and then point to this 90,000. And of course, this is a credit. This is a debit. Those are opposites making this go down, putting this back in balance down here. All right. I'm going to scroll back over. We're going to look at the next transaction. So the next transaction is going to be on 75 sold treasury stock for the amount in the amounts of 1005 shares at a sales price of 30. So now we're going to sell treasury stock back the treasury stock that we purchased. We will now sell back and we're selling it for the sales price. We're going to do the calculation. We're going to have a gain or loss again, very similar to if we had actually purchased someone else's stock. We're going to do a similar calculation. But we are, of course, selling our own stock back to the market. Note that this is going to be different than when we originally issued the stock. We're selling treasury stock, which is stock that we purchased back in our selling, not stock that we are originally issuing out to the public. So we're going to post this out. It's going to be 1500. And the cost or sales price, in this case, the sales price is going to be 30. The amount in dollars is going to equal the 1005 shares times 30. So that's going to be the sales price. Now let's calculate the cost. And the cost is going to be the same, 1005 shares. And the cost, remember, was back in this transaction, we bought 5000 shares at 25. So the cost is 25 per share, because we're selling part of this 5000 shares. And therefore we're going to multiply that out. This equals the 5000 shares times the 25. That gives us the 37.5. If we subtract that out, that will give us the gain or loss. We're going to say this equals the 45,000 sales price minus the 37.5 and enter. We should also be able to come up with this 7.5 by doing this. We can say the 1.5 and we can take the difference in the sales price versus the cost per share, which is $30 minus $25. And so if we take the 1,005, 1.5 times 5, we will get the same 7.5 here. Let's think about that in terms of a journal entry. So we're going to be over here and we are now on 7.5 and we're going to post this journal entry. First question we'll have, let's scroll back over here. We can see our chart of accounts on this first question. Is cash affected? And we're going to say, yeah, cash is affected. We sold our treasury stock for cash. And therefore cash has a debit balance. We're going to make it go up.